The Internal Revenue Service (“IRS”) recently published a private letter ruling (“PLR”) that permits a practice management corporation to include two managed professional corporations as members of the management corporation’s affiliated group for purposes of filing a consolidated federal income tax return. This PLR could prove important for business corporations that provide healthcare management and administrative services to professional corporations and that effectively (but not technically) own such professional corporations.
Many states provide by law that a business corporation engaged in the provision of a professional service must be owned by one or more licensed professionals. As a result, a professional corporation cannot be the subsidiary of a parent entity that is not a professional corporation.
In the PLR request, a licensed professional was the sole shareholder of two professional corporations. A non-professional company performed all administrative and support services, including financial reporting, information systems support, and billing, on behalf of the professional corporations for a fee. The non-professional company also provided management services to the extent allowed under the applicable state law.
The shareholder of the two professional corporations entered into an agreement with the management company pursuant to which the shareholder served as the professional director of the professional corporations. The shareholder, the management company, and each professional corporation also entered into stock transfer restriction agreements. Under these agreements, the shareholder’s rights were substantially limited, and the management company effectively had the right to designate who would own the shares of the professional corporations in the event the shareholder no longer served as the professional director for the professional corporations.
Specifically, under the director agreement, the management company had the right to terminate the shareholder’s position as the professional director of the professional corporations. This, in turn, would trigger a transfer event under the stock transfer restriction agreement, requiring the shareholder to transfer all of the shareholder’s shares in the professional corporations to a designee of the management company. The IRS ruled that the two professional corporations were members of the affiliated group with the management company.
While a PLR may only be relied upon by the specific party requesting the ruling, other corporations with similar circumstances may find PLR 201451009 instructive. With proper planning and consideration of other relevant tax and state law issues, certain healthcare companies and service providers may be well-served to further consider this ruling.
The Office of Civil RIghts (“OCR”) recently announced that Phase 2 of the HIPAA audits would be further delayed because the audit portals and project management tools that are needed to initiate the audit process are not ready and available for usage. Phase 2 of the HIPAA audits was initially slated to begin in the fall of 2014 and was subsequently moved to late 2014 or early 2015. Currently, no timeline has been provided as to when the next round of audits will officially begin.
A delay in Phase 2 of the OCR HIPAA Audits does not mean that covered entities and business associates should not continue to make sure they are in compliance with all HIPAA regulations. The potential consequences for failure to comply with HIPAA regulations are significant. While the audit portals are still under development, it is a good time for covered entities to (i) make sure their HIPAA policies and procedures are up to date and meet the latest privacy and security requirements, (ii) create a list of all business associates that provide services to the covered entity, and (iii) conduct an internal risk assessment to identify potential risks and vulnerabilities to the confidentiality, integrity, and availability of electronic protected health information held by the covered entity.
Among other things, Parker Poe’s healthcare attorneys advise our healthcare clients about (i) compliance with HIPAA’s privacy requirements as they affect healthcare information, including preparing employee and patient notices, plan policies and procedures, plan amendments and authorization and other forms, and (ii) HIPAA compliance requirements for business associates.
The False Claims Act (FCA) imposes liability on individuals and companies who defraud or submit false claims to the federal government. The FCA allows the federal government to seek treble damages, civil penalties and attorney’s fees for violations of the Act. Further, the FCA contains qui tam, or whistleblower, provisions which award whistleblowers up to 30% of the amount recovered by the federal government. FCA suits and recoveries have exploded in recent years. The federal government reports that FCA recoveries have topped $22 billion since 2009. Accordingly, the FCA is widely considered the fastest growing area of federal litigation and has been described as the “government’s most potent civil weapon in addressing fraud.”
Historically, FCA claims have targeted the health care industry, and 2014 was no exception. According to the Department of Justice, more than 60% of new matters were health care related, and 2014 health care-related recoveries exceeded $2.3 billion. This is the fifth straight year the federal government has recovered more than $2 billion from companies in the health care industry.
Pharmaceutical companies accounted for a substantial part of the $2.3 billion recovered from the health care industry in 2014. For example, Johnson & Johnson and two of its subsidiaries paid $1.1 billion to resolve FCA claims involving allegations it violated the Anti-Kickback Statute by making improper payments to physicians and a pharmaceutical provider and engaged in off-label marketing of three prescription drugs.
The federal government also focused on hospitals, nursing homes, home health and hospice agencies and physician practices in 2014. For example, one large hospital chain paid more than $98 million dollars to resolve allegations it improperly billed Medicare, Medicaid and TRICARE for inpatient services which could have been provided in a less costly setting. A large nursing home provider paid $3.75 million to resolve allegations that it billed Medicare for unnecessary rehabilitation services. A Tennessee-based home health agency paid over $25 million relating to allegations that it upcoded services provided unnecessary care.
Given the risk and devastating effect that an FCA allegation can have, health care providers should take internal reports of misconduct seriously. Although whistleblowers have a great financial incentive to report alleged misconduct to the government, studies show that most whistleblowers report their conduct internally before going to the government. Emphasizing the your compliance plan and conducting timely internal investigation when internal reports of misconduct are made by staff or patients may defuse a FCA suit before it begins.
James C. Lesnett, Jr. and Eric H. Cottrell have substantial experience investigating and litigating FCA issues. They have also successfully helped clients avoid FCA litigation through direct pre-trial settlement negotiations with governmental authorities.
In March 2013, the Federal Trade Commission, together with the Idaho Attorney General, filed a complaint seeking to block St. Luke’s Health System’s planned acquisition of Saltzer Medical Group P.A., a multi-specialty physician practice group, According to the complaint, the combination of St. Luke’s and Saltzer would provide St Luke’s with sufficient market power to demand higher rates for health care services in Nampa, Idaho and surrounding areas, ultimately leading to higher costs for health care consumers. According to the findings of facts for the case, St. Luke’s and Saltzer combined practices accounted for almost 80 percent of the primary care physicians in the relevant market. The federal district court ordered St. Luke’s to divest Saltzer’s physicians and assets.
Today (February 10, 2015), the Ninth Circuit upheld the ruling from the lower court and ordered St. Luke’s to unwind its purchase of the practice group. The court was not swayed by St. Luke’s argument that the acquisition would lead to greater efficiency and quality of care and would help the hospital meets its obligations under healthcare reform.
History of the case is available here.
Parker Poe’s healthcare attorneys advise our healthcare clients regarding a wide range of antitrust matters, including guidance afforded to the healthcare industry as set forth in the Statements of Antitrust Enforcement Policy in Health Care.